AI trade reversal cuts quant hedge funds’ gains

A Goldman Sachs client note showed a sharp reversal in AI-related positions reduced year-to-date returns for systematic, model-driven hedge fund strategies from 14.4% in late June to 10.8% after losses in late June and early July.

The note linked the losses to the unwind of crowded AI and semiconductor positions that produced declines across major US stocks, developed Asian markets and parts of Europe.

Heightened volatility in technology names, particularly semiconductor shares that had been among the year’s strongest performers, caused abrupt price swings that affected many quantitative models at the same time.

Goldman estimated the moves were concentrated in heavily held positions in US equities and developed Asian markets, with smaller effects in European stocks.

South Korea saw larger swings, where elevated retail investor leverage amplified price moves and increased losses for funds exposed to crowded trades.

S&P Global data show quantitative strategies accounted for roughly 10% of the world’s largest hedge funds in 2025.

Fundamental equity hedge funds also posted losses over the period. Goldman estimated a 2.2% decline for discretionary managers during the same sell-off, while those stock-pickers reported cumulative returns near 15.5% for the year.

Many fundamental managers reduced exposure to AI-related holdings, selling or trimming positions that had previously contributed to performance. Hedge fund leverage fell to its lowest level in the past year.

Regulators including the Bank of England, the Bank of Japan and the Bank for International Settlements have highlighted the risks of concentrated positions and elevated leverage in equity markets.

Following the sell-off, managers reduced risk and reassessed exposures to AI and technology names.